Author: Wu Gangliang
Reform comes first, legislation comes later. Reform drives legislation. In 1993, an important reason for the promulgation of the Company Law was the need for the reform of state-owned enterprises, because at that time, it was necessary to elevate major policies and reform measures such as the property rights of legal persons and the modern enterprise system into law.
In 2015, the "Guiding Opinions on Deepening the Reform of State-owned Enterprises" was promulgated, which opened the prelude to a new round of reform of state-owned assets and state-owned enterprises. After the "5+3 years" reform, the system and mechanism of state-owned enterprises have undergone profound changes. At present, the deepening and upgrading of the reform of state-owned enterprises is being implemented.
Since the 18th National Congress of the Communist Party of China, the reform of state-owned enterprises, focusing on the top-level design of the 1+N policy system, on the basis of the special pilot project, has formed a lot of experience that can be used for reference and replication, which needs to be comprehensively promoted and applied. As an enterprise organization law, the Company Law needs to absorb the achievements of the new round of state-owned enterprise reform and mature and finalize some effective reform measures.
Picture: Mr. Wu Gangliang gave a lecture at Peking University for the leading cadres of China Railway Chengdu Bureau Group.
Prior to the commencement of the revision of the Company Law, two different views were formed on whether the results of SOE reform should be included in the Company Law.
One view is that since state-owned companies are large in size and occupy an important position in the main body of the market, and the new round of state-owned enterprise reform is vigorous and has many policies, the "Company Law" should devote a special section to the "Company Law" to include these new reform models.
On the contrary, they believe that the Company Law should follow the concept of equality of market entities and should not be treated differently due to the different ownership systems of the company's capital. Accordingly, they suggested that the entirety of the special provisions on state-owned enterprises in the current Company Law, including the section on "wholly state-owned companies", should be deleted. In view of the particularity of state-owned enterprises, consideration may be given to establishing a separate "State-owned Company Law" or "State-funded Enterprise Law" to specifically regulate state-owned enterprises.
Clearly, the legislature adopted the first opinion. In the Explanation of the revised draft of the Company Law released in December 2020, it was clearly pointed out that "the revision of the Company Law is necessary to deepen the reform of state-owned enterprises and improve the modern enterprise system with Chinese characteristics."
In the newly revised "Company Law" adopted yesterday, a large number of special provisions for state-owned enterprises have been added, and the original section of the Company Law, "Special Provisions on Wholly State-Owned Companies," has been adjusted into a special chapter, that is, Chapter VII, "Special Provisions on the Organization of State-Funded Companies." In view of this, some scholars jokingly claim that the "Company Law" is about to be revised into a state-owned enterprise restructuring law.
Below, Lao Wu will interpret the new regulations (a total of 10 articles) of Article 168 177 of Chapter VII of the Company Law in combination with the actual situation of the current reform of state-owned enterprises
Article 168 The provisions of this Chapter shall apply to the organizational structure of state-funded companies;Where there are no provisions in this chapter, other provisions of this law apply.InterpretationAfter years of equity diversification reform and mixed ownership reform, some group companies are no longer wholly state-owned companies. Specifically, some have engaged in the "central and local cooperation" model, such as China Southern Airlines Group and China Eastern Airlines GroupSome are newly established state-owned enterprises, such as China Rare Earth Group and China Logistics GroupThere are also some state-owned banks that have been listed on the stock market through the overall share reform, such as industry, agriculture, China, construction, etc.;There are also some enterprises with 10% equity in the social security council.The term "state-funded company" as used in this Law refers to wholly state-owned companies and state-owned capital holding companies funded by the state, including state-funded limited liability companies and shares
After the reform of a wholly state-owned company, it has become a company with diversified shareholdings, and the original special provisions on wholly state-owned companies no longer apply to it, and it may become a "fish that slips through the net" of the special provisions. Therefore, the current revision of the Company Law creates the concept of "state-funded companies" and expands the scope of special provisions to state-owned capital holding companies, regardless of whether they are joint-stock companies or limited liability companies. This new provision of the Company Law is in line with the new situation in the reform of state-owned enterprises.
Lao Wu emphasized a special sentence here: state-funded companies specifically refer to first-class companies. The mixed-ownership reform and equity diversification of subsidiaries have long been the norm, and they can be applied in accordance with the regulations of enterprises invested by state-funded companies.
In addition, the provisions of this article on "state-funded companies" are inconsistent with the provisions of the State-owned Assets Law on "state-funded enterprises". Article 5 of the State-owned Assets Law stipulates that the term "state-funded enterprises" as used in this Law refers to state-funded wholly state-owned enterprises, wholly state-owned companies, as well as state-owned capital holding companies and state-owned capital shareholding companies.
Article 169 State-funded companies shall be represented by the State or local people** respectively to perform the duties of investors in accordance with law, and enjoy the rights and interests of investors. Or the local people may authorize the State-owned assets supervision and administration institutions or other departments and institutions to perform the duties of investors on behalf of the people at the same level to the state-funded companies.InterpretationIn practice, institutions that perform the duties of investors are also referred to as "representative offices of investors". The Act specifies who is qualified to act as an institution that performs the duties of a funder.Institutions and departments that perform the duties of investors on behalf of the people at the same level, hereinafter collectively referred to as institutions performing the duties of investors.
At present, the centralized and unified management of commercial state-owned assets has been shouted for many years, but in reality it is still a situation of "each in charge and one share". In addition to the SASAC at all levels, there are also financial departments, party and government departments and public institutions that are managing their own state-owned enterprises, such as financial state-owned assets, cultural state-owned assets, university state-owned assets, etc.
Article 64 of the current Company Law stipulates that the representative office of the investor of a wholly state-owned company is only "the people's state-owned assets supervision and administration institution at the same level". However, the "State-owned Assets Supervision and Administration Agency", in accordance with the law, refers specifically to the SASAC system, including all levels of SASAC (bureaus, offices), and does not include other departments such as the financial department.
Since the legal provisions are inconsistent with the actual situation, it is necessary to include "other departments and agencies". This may further "legitimize" the situation of "each in charge and one share", but considering that there are indeed some state-owned enterprises whose particularities are too obvious, it is not appropriate for all of them to be placed under the supervision of the SASAC system.
Article 170 The organizations of the Communist Party of China in state-funded companies shall, in accordance with the provisions of the Constitution of the Communist Party of China, play a leading role, study and discuss major business and management matters of the company, and support the company's organizational structure in exercising its functions and powers in accordance with the law.InterpretationThe leadership role refers to setting the direction, managing the overall situation, and ensuring implementation. The party organizations of state-owned enterprises should set up "pre-procedures" to study and discuss the "three major and one major" matters, and make it clear that the study and discussion of the party organizations is the pre-procedure for the board of directors and managers to make decisions on major issues, and major business and management matters must be studied and discussed by the party organizations before the board of directors or managers make decisions.
In practice, attention should be paid to clarifying the boundaries of the powers and responsibilities of the party organization, the board of directors and the managerial level. For details, please refer to my article on the boundaries of the rights and responsibilities of the party committee, board of directors, and managers of state-owned enterprises.
Lao Wu noticed that the party organization's "leading role" is completely different from "playing the role of the political core." The "leading role" means that the party organizations of state-owned enterprises should be in charge of production and operation, although it is only "discussion" rather than "decision". If private enterprises meet the conditions, they should also set up party organizations, but they play the role of "political core" and are mainly in charge of ideology.
Article 171: The articles of association of a wholly state-owned company shall be formulated by the institution performing the duties of the investor.InterpretationThe institution of a wholly state-owned company that performs the duties of an investor is equivalent to that of the sole shareholder of a state-owned enterprise, although its rights and obligations are slightly different from those of shareholders. The Articles of Association are the constitution of the company. The articles of association of a wholly state-owned company are mainly used to bind the board of directors and managers, rather than the agreement between shareholders.
It is worth noting that the directors of a wholly state-owned company are all appointed by the institution that performs the duties of the investor, so they have more trust and have the right to formulate and amend the articles of association in practice. In December 2020, the State-owned Assets Supervision and Administration Commission (SASAC) and the Ministry of Finance jointly issued the Administrative Measures for the Formulation of Articles of Association of State-owned Enterprises, which stipulates that the articles of association of wholly state-owned companies shall be formulated by the investor institution, or shall be formulated by the board of directors and submitted to the investor institution for approval. The investor institution may authorize the preparatory body for the establishment, reorganization or restructuring of the enterprise and other decision-making bodies to formulate a draft articles of association and submit it to the investor institution for approval.
Article 172 A wholly state-owned company shall not have a shareholders' meeting, and the institution performing the duties of the investor shall exercise the functions and powers of the shareholders' meeting. The institution performing the duties of the investor may authorize the board of directors of the company to exercise part of the functions and powers of the shareholders' meeting, but the formulation and amendment of the articles of association, the merger, division, dissolution, bankruptcy application of the company, the increase or decrease of the registered capital, and the distribution of profits shall be decided by the institution performing the duties of the investor.InterpretationWith the deepening of the reform of state-owned enterprises, the model of "managing people, affairs and assets" is being replaced by the model of "managing capital". "Managing capital" emphasizes corporate governance rather than direct management, and expresses the will of investors through the appointment of directors.
In recent years, state-owned enterprises (SOEs) have implemented reform measures such as the establishment of a board of directors, the implementation of the functions and powers of the board of directors, and the majority of outside directors. In order to enhance the independence and authority of the board of directors and fully delegate powers, the Company Law stipulates that "an institution performing the duties of an investor may authorize the board of directors of a company to exercise part of the functions and powers of the shareholders' meeting", which is an important achievement of the current round of state-owned enterprise reform.
It is worth mentioning that the formulation and amendment of the articles of association, the merger, division, dissolution, bankruptcy application, increase or decrease of registered capital, and the distribution of profits of the company are particularly important matters and should be decided by the institution performing the duties of the investor, and cannot be delegated to the board of directors to make decisions.
In addition, the State-owned Assets Law also stipulates that for important state-owned enterprises, particularly major matters must be approved by the people at the same level, and the performance of the investor agency has no right to decide on its own. Article 34 of the State-owned Assets Supervision and Administration Law stipulates that the merger, division, dissolution, bankruptcy application of important wholly state-owned enterprises, wholly state-owned companies, state-owned capital holding companies, and major matters that laws, administrative regulations and the people's regulations at the same level shall be reported to the people at the same level for approval by the institutions performing the duties of the investors, and the institutions performing the duties of the investors shall report to the people at the same level before making a decision or giving instructions to the shareholder representatives who are appointed to participate in the shareholders' meetings and shareholders' meetings of the state-owned capital holding companies Approve.
Article 173 The board of directors of a wholly state-owned company shall exercise its functions and powers in accordance with the provisions of this Law.InterpretationThe system of a majority of outside directors is an important achievement of the new round of SOE reform. In fact, in addition to wholly state-owned companies, the Group's wholly-owned subsidiaries are also vigorously promoting the system of majority of outside directors. Outside directors are appointed by the State-owned Assets Supervision and Administration Commission (SASAC) or group companies, do not receive remuneration from the enterprise they work for, and do not have a labor contract relationship with the company, so they can maintain a certain degree of independence, restrain managers and internal directors, realize the separation of decision-making power and executive power, and prevent insider control.More than half of the members of the board of directors of a wholly state-owned company shall be outside directors and shall have employee representatives of the company.
The members of the Board of Directors are appointed by the body that performs the duties of the funder;However, the employee representatives of the board of directors are elected by the company's employee representative congress.
The board of directors shall have a chairman of the board of directors and may have a vice chairman. The chairman of the board of directors and the vice chairman of the board of directors shall be appointed from among the members of the board of directors by the institution that performs the duties of investors.
Outside directors of a wholly state-owned company are not the same as independent directors of a listed company. Independent directors mainly represent the interests of minority shareholders and are independent of major shareholders and managementOutside directors are independent only from management, but not from major shareholders. In a wholly state-owned company, since there are no minority shareholders, the outside directors themselves are the representatives of the organization that performs the duties of the investor. At present, there are two types of outside directors in SOEs: part-time outside directors and full-time outside directors, and at the subsidiary level, the majority are full-time outside directors appointed by the group.
The outside directors of state-owned enterprises are mainly borrowed from Singapore's Temasek board system. At present, we have formed a mature set of open selection, assessment and exit mechanisms. **SASAC has publicly stated on several occasions that the system of external directors operates better than the independent directors of state-controlled listed companies.
Since a wholly state-owned company does not have a shareholders' meeting, the members of the board of directors are not elected by the shareholders' meeting, but are appointed by the body that performs the duties of the investor. The chairman of the board of directors and the vice chairman of the board of directors are appointed from among the members of the board of directors by the institution that performs the duties of the investor, rather than being elected by the board of directors, which fully reflects the will of the investor. In practice, the chairman of a wholly state-owned company generally serves as the secretary of the party committee, and the secretary of the party committee is generally a central, provincial or municipal cadre, so this role is generally not self-elected by the board members.
Employee directors represent the interests of employees and safeguard the right of the vast number of employees of state-owned enterprises to be masters of their own affairs. In practice, those who can serve as employee directors are generally not ordinary employees, but are mainly full-time deputy secretaries of party committees and chairmen of labor unions. Some scholars believe that employee directors are themselves insiders and have a dependency relationship with the management, so they cannot effectively supervise the management, which is not conducive to solving the internal control problem. Lao Wu believes that the main responsibility of the employee directors of state-owned enterprises is not to supervise and manage the management, but to safeguard the legitimate rights and interests of the employees.
Article 174 The manager of a wholly state-owned company shall be appointed or dismissed by the board of directors.InterpretationIn accordance with the requirements of the reform, wholly state-owned and wholly-owned companies implement the integration of "directors, secretaries, and laws", that is, the chairman, secretary, and legal representative are "shoulder-to-shoulder" by one person, and they are veritable "number one". The other person serves as the general manager, deputy secretary of the party committee, and director, and is the "second-in-command". Article 174 is a reflection of this current situation in the distribution of posts. The term "manager" in the Company Law refers to the managerial level in practice, including the general manager.With the consent of the institution that performs the duties of a funder, a member of the board of directors may also act as a manager.
In recent years, with the implementation of reform measures such as the implementation of the six functions and powers of the board of directors, the board of directors of state-owned enterprises has been given the right to select and appoint managers. In practice, however, progress has been slow. Especially in wholly state-owned companies, managers are team members and cadres directly managed by organizational departments. In accordance with the principle that the party is in charge of cadres and talents, these personnel are directly appointed and dismissed by the higher-level party organizations. The Board of Directors only has the right to go through the appointment process.
The Company Law stipulates that "managers shall be appointed or dismissed by the board of directors", which at least clarifies the future reform direction of the modern enterprise system with Chinese characteristics. At present, only a very small number of wholly state-owned companies have explored the system of professional managers, implemented the board of directors to openly recruit general managers from the public, and combined the party's management of cadres with the market-oriented selection and employment.
Article 175 The directors and senior managers of a wholly state-owned company shall not hold a part-time position in another limited liability company, a joint-stock company or other economic organization without the consent of the institution performing the duties of an investor.InterpretationIn order to strengthen honest practice and prevent the transfer of benefits, relevant laws, regulations and party regulations have very strict requirements for the part-time behavior of leaders of state-owned enterprises. Without the approval of the higher authorities, they cannot work part-time in other economic organizations other than the subsidiary. Even if they are allowed to hold leadership positions in other enterprises, public institutions, social organizations, and intermediary organizations, they cannot receive salaries and other income without authorization. Even after retirement, there are strict rules and approval procedures for part-time jobs. The Criminal Law also stipulates the crime of illegally operating the same type of business for the use of part-time jobs to transfer profits, where the circumstances are serious.
In addition, as for party and government leading cadres who concurrently serve as members of the leading groups of state-owned enterprises, according to Lao Wu's understanding, part-time jobs can only be temporary, and they do not receive salaries in enterprises, and they must "choose one of the two" between civil servants and enterprise personnel when they expire.
Article 176 Where a wholly state-owned company sets up an audit committee composed of directors in its board of directors to exercise the functions and powers of the board of supervisors as provided for in this Law, it shall not have a board of supervisors or supervisors.InterpretationThe establishment of the board of supervisors of state-owned enterprises should be understood in conjunction with Articles 69, 83 and 121 of the Company Law.
Article 69 stipulates that a limited liability company may, in accordance with the provisions of the articles of association, set up an audit committee composed of directors in the board of directors to exercise the functions and powers of the board of supervisors as provided for in this Law, and shall not have a board of supervisors or supervisors. Employee representatives on the board of directors of a company can become members of the audit committee.
Article 83 stipulates that a limited liability company with a small scale or a small number of shareholders may appoint a supervisor without a board of supervisors to exercise the functions and powers of the board of supervisors as provided for in this LawWith the unanimous consent of all shareholders, there may also be no supervisors.
Article 121 stipulates that the board of directors may set up an audit committee composed of directors in the board of directors in accordance with the provisions of the articles of association of the company to exercise the functions and powers of the board of supervisors as provided for in this law, and there shall be no board of supervisors or supervisors.
Summarizing the above provisions, it can be seen that SOEs can choose to retain the board of supervisors or abolish the board of supervisors. However, according to Lao Wu's observation, the current general trend of state-owned enterprise reform is to cancel.
At the level of wholly state-owned companies, due to the merger of the expatriate board of supervisors into the audit department in 2018, there are problems such as the absence of a chairman of the board of supervisors and the imperfection of the board of supervisors. Therefore, prior to the current amendment of the Company Law, the board of supervisors had in fact been abolished.
At the level of subsidiaries at all levels, boards of supervisors or supervisors were generally set up in the past, especially for listed companies and large-scale important subsidiaries. However, according to the new provisions of the Company Law, state-owned enterprises at all levels can do without a board of supervisors. The abolition of the board of supervisors is in line with the actual situation of state-owned enterprises, because state-owned enterprises have a "six-in-one" supervision system, even if there is no board of supervisors and supervisors, there are party committee supervision, audit supervision, inspection and other supervision methods can be replaced.
Article 177: State-funded companies shall establish and complete internal supervision and management and risk control systems in accordance with law, and strengthen internal compliance management.InterpretationThis regulation actually mentions the "three-in-one" supervision system of internal control, risk management and compliance management of state-owned enterprises. Operating in accordance with the law and managing in compliance are the requirements for preventing risks and building a world-class enterprise. In 2022, the State-owned Assets Supervision and Administration Commission (SASAC) issued the Measures for the Management of Enterprise Compliance, and strengthening compliance management is one of the important tasks of SOE reform.
In practice, there is a certain overlap between the three systems of internal control, risk management, and compliance management, and it is necessary to coordinate and integrate relevant functions and unify the management platform. At present, state-owned enterprises are taking advantage of the opportunity to strengthen compliance management and explore a model of "strengthening internal control, preventing risks, and promoting compliance" in line with their own conditions.
Finally, Lao Wu once again reminded that from a legal point of view, Chapter VII of the Company Law, "Special Provisions on the Organization of State-Funded Companies", only applies to the first-level companies (group companies) of state-owned enterprises, and other provisions of the Company Law can be applied to their subsidiaries.
However, due to the sinking of state-owned enterprise assets in recent years, the sinking of business and personnel, and the characteristics of "penetrating" management of state-owned capital, subsidiaries at all levels also refer to the governance model of first-level companies, such as the pre-procedure of the party organization, the establishment of employee directors, the majority of external directors, the chairman and the general manager in principle, and so on.
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